The stock market will crash again. It's not a question of whether, but rather when. Perhaps the biggest near-term risk is that high and still rising inflation might provide the push that causes the next major drop. How? Well, the Federal Reserve's expedited meeting scheduled for Monday might lead to faster and more aggressive tapering than the market already expects. That could cause a shift out of riskier assets like stocks, leading to a market correction.
Whether or not that particular scenario comes into play, the reality is that stocks can go down as well as up. If you recognize that and plan for it appropriately, you can make it through a mere market crash -- and emerge on the other side in a great spot to ride any subsequent recovery.
With that in mind, here are four reasons not to worry about a stock-market crash.
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1. You don't need to sell your stocks today
As a general rule, you should not have money invested in stocks that you expect you'll need to spend within the next five years. If you have followed that guideline, it becomes much easier to stomach a market crash. It's still not fun, but you can make it through.
After all, if you don't need the money immediately, then you don't have to sell shares when they're low just to cover your bills. That gives you the chance to not only hold on through a crash, but also to potentially add more to strong companies while they're near their cheapest. The ability to buy low -- instead of selling low -- allows you to end up in a better spot once the crash passes.
2. You have emergency money stocked away, just in case
One of the bigger risks most people face when the market crashes isn't the crash itself, but rather the fact that a down market is often linked to job losses. Even if you fully intend to hold on to your stocks through a crash, if you find yourself without a paycheck and with no cash buffer, you could wind up needing to sell due to that job loss.
A three- to six-month emergency fund buys you time to both look for another job and figure out ways to cut costs before you feel forced to sell your shares. It's a buffer that can come in incredibly handy in a tough environment. It's also one of those things that you hope you'll never have to use -- but if you do, you'll be incredibly glad it's there when you need it.
3. You own strong companies that still pay their dividends
The beauty of a stock's dividend is that it tends to get paid based on the underlying company's ability to generate cash, rather than on the stock market's short-term mood. When companies continue to pay their dividends in a down market, that helps investors in a number of ways.
First, the cash itself can be used to buy more shares while they're down -- either of the company that paid the dividend, or of a different one that looks like a compelling value at a low price. That cash becomes available without you having to sell stock or somehow scaring up money from another source, which can be comforting if you're a bit nervous about the future.
Second, the fact that companies continue to make their payments from available cash flows can provide a calming effect for investors, even as the market appears to panic around them. After all, there's nothing quite like cold, hard cash to remind people that there's a business behind each stock. If a dividend is still supported and getting paid, it means there's still a successful company there, no matter what the stock price might say at the moment.
4. You have a value investor's mindset
Ultimately, a share of stock is an ownership stake in a business. If that business is currently profitable and expected to remain that way, each share is certainly worth something. Value investors recognize that a company's intrinsic worth is based on its ability to generate cash over time, and not simply on what the market thinks its shares should be priced at today.
As a result, a market crash can make great companies' shares available at a price below what those value investors believe they're really worth. That sort of pricing turns value investors into aggressive buyers during a crash, and it's a key part of the strategy that helped Warren Buffett earn and expand his fortune.
Especially when combined with the first three reasons not to worry about a stock-market crash, this fourth reason can actually give you an opportunity to profit from one. After all, if you've got the cash to ride out the decline and the wherewithal to buy near the lows, you have the opportunity to make some serious coin in any subsequent recovery.
Are you ready for the next crash?
While these four factors can help you make it through a market crash with much less worry, they all work much better if you have them in place before you need them. So start getting your plan in place today. That way, you'll be in a much better place the next time the market crashes.
